Market Overview
As we have seen on several occasions in recent weeks, the course of the risk recovery never seems able to run smoothly. What was seen as an all out risk rally on Monday has hit the buffers again. The question is how much weight markets now assign to the disappointment over Moderna’s COVID-19 vaccination trial not getting the desired data that initial claims had given. US markets pares some of the gains of the risk rally yesterday but appear to have steadied now. The supportive comments of Fed chair Powell have certainly been a key factor in recent market moves and the old adage of “never fight the Fed” once more springs to mind. US equity futures are finding support today, but given how US Treasury yields are a shade lower today, the traction of the rally has again been lost. The prospect of a trending move for risk and to break the shackles of recent ranges still remains some way off. In data out early this morning, UK inflation came in slightly lower than expected on both headline (+0.8%) and core (+1.4%). This is seeping into mild sterling underperformance this morning.
Wall Street fell into the close last night, with the S&P 500 -1.0% at 2923. However, with US futures ticking slightly higher today (E-mini S&Ps +0.4) there is at least a basis of support forming today. Asian markets have been mixed (Nikkei +0.8% and Shanghai Composite -0.6%) whilst European markets are playing catch up on the US negative close, with FTSE futures -0.7% and DAX futures -0.6%. In forex, there is a mild positive bias forming. GBP is the main underperformer along with JPY. Commodity currencies are broadly supported, whilst EUR continues to run on the legacy of the developments with regards to the EU Recovery Fund. In commodities, there has been renewed support for gold and silver, whilst oil is mixed this morning.
It is fairly Eurozone centric for the economic calendar today. First up at 0900BST there is the Eurozone Current Account for March. Then an hour latest the final Eurozone April inflation is at 1000BST. Final headline HICP is expected to be unrevised at +0.4% (+0.4% flash April, +0.7% final March). Final Core HICP is expected to also remain unrevised at +0.9% (+0.9% flash April, +1.0% final March). Then into the afternoon is Eurozone Consumer Confidence at 1500BST which is expected to slide further in May to -24.0 (from -22.7 in April). In the oil market the Weekly EIA Crude Oil Inventories at 1530BST are expected to show a mild build of +1.0m barrels (after the surprise drawdown of -0.7m barrels last week).
Sterling traders may like to keep an eye out for Bank of England Governor Andrew Bailey who is testifying before the Treasury Select Committee today at 1430BST.
Chart of the Day – AUD/JPY
For weeks we have been fearful of the shallowing of the risk recovery, however during this time the Aussie has still been a standout performer. With a more positive risk appetite taking hold this week, the Aussie has outperformed whilst the safe haven yen has struggled. On the AUD/JPY cross, this has now formed two strong candlesticks and a decisive breakout above key resistance at 70.15. This move has taken AUD/JPY to a ten week high and opens for continued recovery towards the next resistance at 72.40. A slight pullback into the close last night has just taken the edge off some of the buying pressure, but once more the market is moving higher this morning. Momentum indicators have been consolidating recently, and they are lagging the price slightly, which lends a degree of caution. However, if RSI were to move into the mid-60s and MACD lines continue to accelerate to four month highs, it would add conviction to the upside break. The inference of yesterday’s move is an upside break from a range 67.60/70.15 which implies 250 pips of further upside towards 72.60. Initial resistance is 71.50 but a test of the next real overhead supply at 72.40 is well within scope of the move now. The range breakout at 70.15 is initial support for an intraday pullback, whilst the hourly chart shows a near term buy zone between 69.50/70.15. A failure under 68.50 would now abort the breakout potential.
A second positive close in a row, with the market holding above the $1.0890 pivot, this leaves a growing positive bias now. Although the market continues to trade within what is now approaching a seven week trading range between $1.0725/$1.1015, there is developing positive intent. However, reaching the top of the trading band is one thing, but breaking out is entirely different. The bulls need to drive the RSI to closing above 60 to really suggest there is a serious momentum behind the move. Furthermore, MACD lines need to be accelerating above neutral. These would both then be positioning with decisive two month highs and suggest the bulls are really in control. For now, trading above the $1.0890 pivot leaves a positive bias within the range, for pressure towards $1.1000/$1.1015. The market is ticking higher again early today and we are happy to position for a test of $1.1000/$1.1015. The hourly chart shows the market starting to find support at higher levels and pushing on with increasingly positive momentum. There is support now $1.0900/$1.0920 today and expect a retest at least of yesterday’s high of $1.0975. A decisive close above $1.1000/$1.1015 opens $1.1145 as the next key resistance. Failure back under $1.0890 would neutralise again.
As the dollar has come under pressure in recent sessions, this has driven a Cable rebound. However, the move is now into an important near term phase and the strength of the bulls is being tested. The supply from all the old lows of April and early May between $1.2160/$1.2265 will house a raft of stale bulls who have been licking their wounds for the past week. The market is now testing their resolve. A couple of positive candles may have improved the very near term outlook, but there needs to be a decisive move clear of this resistance band to suggest the bulls are confident of this rally continuing. The rebound has stalled in the past 24 hours (and will not be helped today by a slight negative surprise in the UK inflation data). A downtrend of the past three weeks on Cable is creaking with the rally, but already we see momentum is beginning to struggle. The RSI losing steam in the mid-40s around the level where previously it had used as a floor is an indication that the old support is still new resistance. Hourly momentum is also beginning to tail lower this morning. Initial support at $1.2215 being breached would reflect the market falling away again, with negative momentum mounting below $1.2180.
With risk appetite improving early this week, the outlook for the yen has taken a knock. Even against the dollar (which has also been hit amidst improved risk flows), this is driving USD/JPY higher. There is now beginning to build some positive traction on the pair and pressure is building on the old April resistance around 108.00/108.10. This comes as a mini uptrend continues to build over the past two weeks (today at 107.25) and momentum indicators position for breaches of this resistance. The RSI is now edging towards 8 week highs, along with Stochastics moving towards strong positive configuration. A slight pullback into the close last night has been supported today and although another move on 108.00 has initially been rebuffed, the pressure is mounting. A close above 108.10 would confirm a breakout and arguably a small base pattern that would imply a test of the 109.40 April high. The hourly chart shows support forming at higher levels and near term buying into weakness. A breach of 107.20 would change this recovery outlook and neutralise the move once more.
After the disappointment of not confirming the breakout to multi-year highs, the gold bulls have managed to pick themselves up and support the market once more. There is still the risk of a hangover from what remains of a shooting star candlestick reversal from Monday, but the lack of real follow-through suggests that a false upside break was simply a false start to the breakout. Holding the support of the old late April/early May highs at $1722 was important and it is interesting to see support returning in each of the past three sessions between $1724/$1726. Posting a positive candle yesterday, the market actually closed at multi-year highs again. It has gone a long way towards settling the market once more. Momentum indicators are also steadying. MACD lines are beginning to regain upside traction, whilst RSI remains above 60. The market is ticking higher again today and the bulls appear to be back on track. A close above $1746 today would confirm the breakout and imply pressure on Monday’s intraday peak of $1764. The importance of support at $1722 is growing.
The June contract rollover for WTI went through without a hitch and the outlook for an oil recovery is still on track. Yesterday’s pullback into the close on Brent Crude was a mild hiccup but momentum of the rally remains positive and should encourage the bulls once more. The market is still positioning for a test of the key April resistance at $36.40, a break above which would be the next crucial step forward in the recovery (WTI has already decisively broken through its equivalent resistance). The technical development is also strong, with the RSI holding steady now in the mid-60s at its highest since early January, whilst MACD lines are rising above neutral also for the first time since January. AN uptrend flanking the recovery comes in at around $32.00 today, whilst the breakout support is $32.25. It suggests that there could still be some near term slippage which would still be an opportunity for the bulls. This is not our base scenario though, with our focus on the resistance at $36.40. If this can be overcome, the bulls will see this as a significant opportunity, as aside from an intraday high of $39.70, there is a massive March gap still to fill down from $45.20.
No matter how hard they try, equity markets just cannot break the shackles of the trading range. Once more the Dow has rallied hard in recent sessions, but only to flounder at the resistance of the April high at 24,765. The re-emergence of selling pressure has posted a negative candle and cut the market 1.6% lower into the close last night. The move simply reaffirms the trading range that has formed pretty much since the early April breakout. With support at 22,790 and resistance at 24,765 the range is now over five weeks old. Moves on momentum indicators re-affirm the range, where RSI continues to oscillate between 46/60 and MACD lines are flat. Hourly indicators suggest continuing to play the range, with near term corrective (bear crosses) on Stochastics and MACD. We talked yesterday about the gap at 23,730 which was left by Monday’s session. A move below initial support at 24,060 would open a filling of the gap. Futures are ticking higher early today which hints at a positive open, but given the disappointment of yesterday’s session, the bulls are on the back foot again within this range. Resistance at 24,765 remains key.
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